THE 5% VAT EXPLAINED FOR EVERYONE

The 5% VAT has been and still is a highly debated topic lately. Let’s see where it comes from, how it got here, and what will happen next. What will happen after this VAT is applied to an increased threshold?

WHAT’S HAPPENING IN EUROPE? The EU allows for a basic VAT rate and up to two reduced VAT rates from the basic rate for various components of the economy for each member state. Let’s see what these rates are in Europe!

For example, Spain has a basic VAT rate of 21% and two reduced VAT rates of 4% and 10%. Germany has a basic VAT rate of 19% and a single reduced VAT rate of 7% applied to different components.

Poland, a country closer to us, has a VAT rate of 23% and two reduced VAT rates of 5% and 8%, respectively. Hungary, our neighbors to the west, have a VAT rate of 27% and two reduced VAT rates of 5% and 18%, respectively.

Why are we drawing this comparison with Europe? To see concretely how we compare to other countries.

WHAT’S HAPPENING CLOSER TO US? As you already know, Romania has a VAT rate of 19% and two reduced rates of 5% and 9% for various components.

Returning to construction and real estate, the reduced VAT rate for social housing, social construction (Paragraph 10 of the EU Directive on reduced VAT rates) is applied differently in each country.

We have cases, such as in neighboring countries in Eastern Europe: Poland and the Czech Republic. Poland has 8% for social housing, representing houses up to 300 sqm and apartments up to 150 sqm. The Czech Republic has 15% for social housing, reduced from 21%, for a maximum of 120 sqm for apartments and 350 sqm for houses.

Finally, we come to Romania: 5% for social housing, meaning any type of housing, houses or apartments, up to 120 sqm and up to 450,000 lei. Notice the difference!

Unlike our neighboring countries in Eastern Europe, we also approve of a price limit. In addition, we do not apply the standard VAT rate only to the price difference above the minimum threshold, but to the entire price.

In other words, if you buy a house for 450,001 lei today, the VAT instantly transforms to 19% for the entire amount. Obviously, we will never find such a price, because most homes near the threshold of 450,000 lei have aligned themselves to be below it.

WHAT WILL BE THE EFFECTS OF INCREASING THE THRESHOLD TO WHICH THIS VAT APPLIES? This happens or will happen with any implemented price threshold. In a few weeks, this threshold will increase to 140,000 EUR (around 680,000 lei). All homes around this price will align themselves below it.

At the same time, the new threshold will trigger cascading price increases for everything below the threshold. This is what has been happening for years now with the current threshold of 450,000 lei since it was increased from 380,000 lei.

The same will happen now! Because historically, this is what happens in the real estate market with new constructions. The price adjustment around the threshold triggers a cascade adjustment at all price levels.

This adjustment will not happen overnight. It is a gradual increase. Therefore, the solution is not to wait, but to sign or reserve the transaction now to preserve the price.

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